Gold upside constrained by inflows into other assets

Aggressive pace of rate hikes may outweigh demand for gold as an inflation hedge, resulting in a net bearish effect on gold 

by NUR HANANI AZMAN / Pic by BLOOMBERG

THE move to contain inflationary pressures with tighter monetary stance by central banks world over may outweigh the precious metal’s role as an inflation hedge, thus limiting its upside price potential. 

As it stands, most of the conditions for gold to go higher are already priced in with gold last traded at US$1,819 a troy oz at the time of writing. 

OCBC Bank economist Howie Lee said most central banks have now listed taming inflationary pressures as one of their core priorities in 2022, which means the global interest rate environment is likely to tighten sharply on aggregate. 

He said the aggressive pace of rate hikes may outweigh demand for gold as an inflation hedge, resulting in a net bearish effect on gold. 

“We think the growing hawkishness among central banks in attempting to tame rising inflationary pressures may push gold towards the US$1,500 an oz level by end 2022. 

“While there is a bullish argument to be made towards gold’s inflation hedging appeal, we expect inflation-heading demand from lifers and corporates to be targeted towards Treasury Inflation-Protected Security while similar demand from retail is aimed towards cryptocurrencies, real estate and equities,” he told The Malaysian Reserve (TMR). 

StashAway Malaysia country manager Wong Wai Ken said if the rate hikes come sooner than expected and inflation remains high, gold could see some upside. 

The outlook now depends much on the US Federal Reserve’s (Fed) actions. 

“We think gold had a slightly negative year, down 4%, in 2021 largely due to the expectations the Fed would raise rates in 2022. The current expectation is for the Fed to hike rates three times this year. 

“Inflows into Gold Exchange Traded Funds remain strong, as it is a staple of any portfolio, however, as a percentage of overall portfolios, it has decreased,” he told TMR. 

Wong believed gold has a role to play in terms of inflation hedging and a safe haven asset and would not go out of style any time soon. 

“The key question is how much allocation should be invested in gold,” he added. 

This time last year gold was trading at US$1,959 an oz before it experienced a price correction and hit a year low of US$1,676 in early March. 

On a monthly chart, the price action has formed a pennant pattern, awaiting a breakout. Local pawn shop operators remain pessimistic about the business outlook for 2022 following the emergence of Omicron and the torrential rains in Malaysia that have caused floods in many states.

Malaysia Pawnbrokers Association president Tan Ho Keng describes 2021 as a bad year for business mainly because of the movement control order and he foresees the same for 2022. 

“The Covid-19 situation doesn’t seem to be getting any better, so the prospects for 2022 don’t look good. With the recent flood, pawn shop operators who are affected need money to start their businesses. 

“We hope the government can give financial aid to help the small and medium enterprises to refurbish their business premises,” he told TMR.